South African stocks and country-specific exchange traded fund plummeted Tuesday after government data revealed the economy fell into a recession for the first time since 2009.
The iShares MSCI South Africa ETF (NYSEArca: EZA) declined 7.1% Thursday and dipped to its lowest level since early 2017.
South Africa’s economy unexpectedly contracted a 0.7% annualized rate in the second quarter, compared to expectations for a 0.6% expansion, the Financial Times reports. The economy also shrunk at a downwardly revised 2.6% annual pace for the first three months of 2018.
“We . . . do not think explicit land grab or damage to property rights is likely but ongoing uncertainty will continue to deter business confidence and investment,” Bank of America Merrill Lynch said.
The statistics agency revealed that South Africa’s agriculture, trade and manufacturing all experienced diminished activity in the second quarter.
“We’ve got financials and banks under quite a lot of pressure, also South African credit retailers leading the fall,” Michele Santangelo, equity research director at Independent Securities, told Bloomberg. “On the industrial side, we see the more South African-economic-centric businesses also under pressure.”
South Africa Risk Profile
The economic weakness raises the country’s risk profile in a time when emerging market assets are under pressure from a strong U.S. dollar and escalating global trade tensions. Furthermore, some observers are concerned it may increase the chances of a credit downgrade form credit agencies, like Moody’s Investors Service.
“Equities, bonds, rands… It’s awful,” Abri du Plessis, a portfolio manager at Gryphon Asset Management Ltd., told Bloomberg. “I’m struggling to see any light. There is now a distinct possibility that there will be a downgrade by year-end and we won’t see the end of it for South Africa’s markets.”
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Further dragging on South Africa’s markets, the rand currency depreciated 3.3% against the U.S. dollar on Tuesday. The rand h as declined 18.4% against the greenback to ZAR15.3622.
Additionally, the yields on benchmark 2026 government bonds rose 20 basis points to 9.2%, their highest level since December.
For more information on the South African markets, visit our South Africa category.